Description

We believe Cytek is a unique stock - one with a strong competitive moat, earnings and balance sheet, yet trades at a heavily discounted multiple to its closest peers. Therefore, Cytek is likely a limited time opportunity - just until a strategic buys them to avoid losing more market share. Life science tool takeout multiples tend to be high due to the stickiness and long product cycles and we expect this will apply to Cytek in the coming years.

• Cytek Biosciences is a producer of best-in-class full spectrum cytometers, which are used in pharmaceutical research, medical research, and patient diagnosis across oncology, immune health, cell and gene therapy, and more. Cytometry is a decades old industry, but full spectrum cytometry (FSC) is a newer technology that supports greater data capture from analyzed cells as more light spectrum crosses through the samples.
• Cytek is the only pure-play full spectrum cytometry device company listed publicly. All of the other relevant peers are housed within bigger device companies: BD, Beckman Coulter, Agilent, Thermo Fisher, Sony, etc. 
• Cytek has fundamentally better technology, structural cost of goods sold advantages, and broader product capabilities, which all contribute to Cytek’s past and likely accelerating future market share capture over legacy incumbents. Despite the high business quality, Cytek’s long-term earnings power is mostly misunderstood by other investors, partly due to the poor coverage it receives from the sell side and partly because management has not spoken much about the mid-term and longer-term earnings profile of the business. We believe is business is likely to double its market share in the flow cytometry market over the next decade and generate robust free cash flow alongside a LDD or greater organic revenue CAGR over the next several years. Additionally, Cytek has a large net cash position that provides some downside protection.
• Aside from most investors not appreciating the earnings trajectory of the business, we believe the opportunity to acquire shares at these attractive prices exists due to the overall life sciences device markets being soft over the last 18 months. Large device peers have all struggled, and the cytometer market declined in 2023 in an industry that is usually not cyclical. Customers protected budgets in the face of inflation and uncertain macroeconomic terrain, but our channel checks and conversations  suggest there is some modest improvement in the market. On the most recent earnings call, the CEO also called out improvement in the sales lead times in China and Europe, which we hope spills over into the rest of APAC and the US. We believe now is an attractive time to own the business given how this uncertainty has brought a fast growing, market leading business into a range that is attractive on mid-term valuation figures.
• We believe applying forward FCF yield targets comparable to larger peers that grow revenue at half or less of Cytek’s growth rates should prove to be a conservative exercise, but we choose to do so to be more cautious in our base case. Applying these yields to our FCF/share estimates in 2027 equates to a $9.45 price target, representing 59% upside and a three-year 17% IRR. In 2030, we project a share price of $15.37, representing 158% upside and a six-year 17% IRR.
• Further, we believe Cytek is one of the most likely companies in our portfolio to be acquired by a strategic in the next few years. Larger companies like Thermo, BD, Danaher, Sony, Agilent, and others are losing market share to Cytek and have technology that is unlikely to catch up to Cytek’s lead. A few of these companies also have robust reagent businesses that would grow nicely with the acquisition of Cytek’s device footprint. This dynamic will likely lead to a share price well in excess of our conservative targets.

Business Model

• Cytek directly manufactures and sells cytometers across a range of clients from pharmaceutical research to medical clinics/hospitals to bacteria research groups and more. The primary market is oncology research and treatment, but newer technologies around cell and gene therapy and other areas are actively utilizing the technology.
• Cytek produces both high end and middle-market cytometers with products ranging in cost from $20k to $700k. Its flagship product is the higher-end Aurora. Cytek also produces cell sorters and reagent cocktail mixers.
• Cytek has approval for clinical settings in both China and the EU. Clinical settings refer to both hospitals and laboratories that process patient samples for medical treatment. Cytek is pending approval for the US clinical market, which we anticipate will occur in mid-2025. The growth of the clinical market will both increase Cytek’s reagent business and also shift part of its device revenue to a reagent-lease model. This means that Cytek will primarily provide the cytometers for free alongside exclusive reagent contracts, a common deal structure in the industry. This will further increase Cytek’s recurring revenue base and yield attractive long-term economics.
• Clients often have several FSC boxes in their facilities, and Cytek has continually taken market share. We expect this will continue.
• Cytek also offers supporting software in its Cytek Cloud offering that creates more efficient workflows for users and utilizes proprietary AI/ML models to generate cleaner and more granular data output from samples.
• Cytek staffs its own maintenance crews and has built a strong margin, recurring service business that is scaling into more mature margin levels as batches of cytometers are growing out of the 1-year maintenance warranty period.
• Cytek also has a nascent but growing presence in reagents, consumables used to enhance and test biological samples. This is only ~4% of revenue today but presents a compelling growth opportunity for several years. Reagent revenue will carry significantly higher gross margin once this business line is at a more mature state. Cytek has strategically focused on the read made kits portion of the reagent market vs. supplying ever last reagent, another smart strategic decision that will lead to accelerated growth but also margin expansion
  
• Revenue mix: 76% product, 20% service, and 4% reagents. 24% is recurring revenue. As the business shifts towards more reagents and less product revenue as a percent of the mix, the revenue visibility will improve. The mature mix of revenue for Cytek would be 50% product, 20% service, and 30% reagents.

Sources of Competitive Advantages

• Superior Technology & IP: Cytek started developing its first cytometer about a decade ago. Other peers began two or three decades earlier. Cytek was able to develop novel technologies without the legacy technical debt, meaning its design could be fundamentally different than peers’. This radical redesign allows for faster and cleaner data output utilizing less overall sample material given the efficiency of the machine. It also allows for more colors of the color spectrum to be readable in the data, which allows for greater depth and breadth of disease diagnosis and cell analysis. All of this is protected by the company’s IP for many years. Even if the technology were not patented, the radical redesign of competitors’ products would take 3-5 years and result in a complete overhaul in manufacturing, design, fulfillment, servicing, and more, and there is no guarantee of success. It would also require 3^rd party testing validation, which takes several months or more to approve. Given this, legacy players are forced to iterate upon legacy designs, meaning competitors’ cytometers are unlikely to be able to produce superior data output and unlikely to reach Cytek’s cost structure lead for the foreseeable future.
• Design-Protected COGS Structure: Due to the radically different design of the boxes, Cytek cytometers contain less than half of the component parts compared to peers’ cytometers. Further, Cytek designed two of its flagship products to utilize the exact same design in external casing, internal fluidics, diode sensors, and more, with the biggest change being the number of lasers inside the casing. This and the overall reduction in components greatly diminish the cost of goods sold. It also results in much less frequent repairs and overall easier preventative maintenance; so much so that some clients are able to handle routine maintenance without a specialized technician, which is not possible with competitors’ products. We believe this advantage will lead to structurally higher product gross margins for the company to the degree of 800-1000 bps over peers, and they should approach this spread within a couple of years.
• Future Design Improvements: When Cytek acquired Luminex, it acquired two products, the Amnis and the Guava. The Guava is a cheaper, easy-to-use device that opened up the lower-middle market opportunity for Cytek. The Amnis is an imaging flow cytometer, which allows researchers to capture images of the cells as they pass through the light spectrum inside the device. Cytek is incorporating this imaging technology into its higher end Aurora devices, which will provide the most detailed and differentiated data capture in the industry. Capturing the actual cell image allows for much more granular analysis of cell membranes, tumor types, and more. This invention is protected by IP and will further increase Cytek’s lead over competitors. We anticipate this product to be launched in early 2026.

Financial Analysis

• Cytek has not provided mid-term or long-term financial targets, and we believe most investors do not understand the future financial profile of the business. In 4-5 years, we believe Cytek will be operating at 25%+ Adj EBITDA margins, with room to grow to 30% or slightly better beyond that. Cytek has proven effective in scaling operating leverage in the last 12 months and will meaningfully improve in the coming years. When Cytek is at 25% Adj EBITDA margins, we believe they will produce 20-22% GAAP FCF margins. Non-GAAP Gross margins will trend to 60% and likely reach 65% at maturity. We believe this financial profile is highly compelling. We have a business that generates strong GAAP FCF today with a massive net cash position that will quickly grow each year aside from any capital allocation decisions made by the management team and board.
• When incorporating the incremental net cash generated by the business, we believe Cytek is trading at an EV/Adj EBITDA of 7.9X on 2027 Adj EBITDA. At the $5.95 share price, it also trades at 16.0X GAAP FCF/Share in 2027, when accounting for 2.5% annual share count dilution in all years of our model. We believe this valuation level is wholly incorrect for a business of this quality with the earnings trajectory it should achieve. On 2025 figures, Cytek is trading at just under 16X EV/Adj EBITDA and a GAAP FCF yield of 3.5%.
• Note that our revenue growth rates are likely conservative to what the company will achieve. In our model, we assume it takes the company until 2031 at nearly $450m of revenue to reach the company’s LT operating model economics.
• Also note that this company has a substantial net cash position and will accrue a lot of cash over time aside from any capital allocation decisions. The business has a market cap today of $804m. In 2027, we project that the company will have $393m of net cash. On our math, the business would be a net-net in early 2032 if there were no dilution. But given the stock comp levels at the company, we grow the share count annually by 2.5%.
• We also recognize that our mid-teens EV/Adj EBITDA multiples and 4-5% FCF yields in the years of our price targets could prove conservative given where slow growing, mature peers trade. These levels result in PTs of $9.45 and $15.37 in 2027 and 2030 respectively
• Life science tools takeout multiples have varied (widely) with many deals well into the high-teens forward EBITDA multiple. Considering Cytek's technology and manufacturing advantage, coupled with FSC growing well faster than the market, we believe the company may be taken out in the coming years at a very nice price, well above our conservative 2027 price target
• Finally, we note that management has strong incentive to create value, with the CEO and CTO owning a combined ~8% of shares outstanding

Catalyst

Profitability metrics in 2024

Re-acceleration of growth in 2024

Takeout